PCAOB Staff Spotlight provides window into PCAOB inspections activities following 2023 bank failures, includes survey responses showing how dozens of U.S. firms responded to disruptions in the banking industry.
A new Spotlight report from the Public Company Accounting Oversight Board (PCAOB) outlines how during 2022 and 2023, several audit firms’ engagement teams working on audits in the banking sector did not adequately identify risks of material misstatement.
The Spotlight – “Bank Financial Reporting Audits” – describes the PCAOB’s inspection response to bank failures in early 2023 and the continued effects of these bank failures on the banking industry and includes an overview of survey responses outlining how dozens of U.S. firms responded to disruptions in the banking industry, including impacts from rising interest rates. It also provides common observations from the PCAOB’s inspection activities, along with a description of good practices at audit firms in key focus areas.
PCAOB Response
- The PCAOB encouraged firms to consider potential risks, including increased volatility in financial and commodity markets due to fluctuations in interest rates and inflationary trends in its June 2022 Spotlight, “Staff Overview for Planned 2022 Inspections.”
- After vulnerabilities in the banking sector were exposed in early 2023, the PCAOB revised its inspection plan to respond in real time, including sending a questionnaire to survey 40 U.S. firms that audit at least one bank, with additional emphasis on the 13 U.S. firms that audit 10 or more banks.
- In response to survey results, the PCAOB adjusted its inspection plan, directing its target team to perform procedures on interim reviews of banks in order to provide real-time perspective on important risks. Inspectors also selected additional bank audits for inspection, and worked to ensure emerging banking and economic trends, and banking issues or common deficiencies, were appropriately considered in our selections.
Key Observations
As they reviewed banking sector audits completed in early 2023 for financial statements dated in late 2022, PCAOB inspectors observed a range of deficiencies. In some instances, for example, engagement teams did not revisit initial risk assessments performed earlier in the year as interest rates continued to rise. Inspectors also observed instances of interest rate volatility being documented as an operational or business issue – with no financial reporting or internal control over financial reporting considerations.
As a result, some engagement teams did not identify in their audits certain risks of material misstatement despite changes in bank-specific or macroeconomic conditions that indicated increased risk in certain audit areas.
Survey Results
In early 2023, the PCAOB sent a questionnaire to survey 40 U.S. firms that audit at least one bank, with additional information requested from the 13 U.S. firms that audit 10 or more banks. The survey was designed to provide insight into how firms evaluated emerging and evolving risks in the sector.
Some of the key responses outlined in the Spotlight include the following:
- Over 70% of the engagement teams did not identify a risk of material misstatement due to rising interest rates.
- Over 95% did not identify a risk of material misstatement related to liquidity.
- Over 95% did not identify a risk of material misstatement through reviewing information from short sellers, analysts, or other publicly available information, and over 65% did not identify any risk of material misstatement related to concentration risks.
- Finally, over 95% of the engagement teams did not identify a risk of fraud related to investments or related disclosures. A few firms indicated rising interest rates were a “business-only” risk, relating to the operations of the bank without directly influencing financial reporting.
Good Practices
In addition to common observations from the PCAOB’s inspection activities, the Spotlight provides a description of good practices observed at audit firms that may enhance audit quality if broadly adopted. The Spotlight provides these insights in in four focus areas:
- Investment securities
- Allowance for credit losses
- Deposit liabilities
- Loans and related accounts
Visit the PCAOB’s Staff Publications page to find this Spotlight Report and more resources on the PCAOB’s activities and observations.